We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards QuinStreet Inc (NASDAQ:QNST) and determine whether hedge funds skillfully traded this stock.
QuinStreet Inc (NASDAQ:QNST) has experienced a decrease in hedge fund interest lately. QuinStreet Inc (NASDAQ:QNST) was in 20 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 28. Our calculations also showed that QNST isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Noam Gottesman of GLG Partners
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers after its stock price crashed. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let's analyze the fresh hedge fund action encompassing QuinStreet Inc (NASDAQ:QNST).
Hedge fund activity in QuinStreet Inc (NASDAQ:QNST)
At the end of June, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from the previous quarter. On the other hand, there were a total of 21 hedge funds with a bullish position in QNST a year ago. With hedge funds' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
More specifically, Private Capital Management was the largest shareholder of QuinStreet Inc (NASDAQ:QNST), with a stake worth $33.4 million reported as of the end of September. Trailing Private Capital Management was Rubric Capital Management, which amassed a stake valued at $29.5 million. Portolan Capital Management, Royce & Associates, and Renaissance Technologies were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Private Capital Management allocated the biggest weight to QuinStreet Inc (NASDAQ:QNST), around 8.26% of its 13F portfolio. Rubric Capital Management is also relatively very bullish on the stock, designating 3.39 percent of its 13F equity portfolio to QNST.
Because QuinStreet Inc (NASDAQ:QNST) has witnessed declining sentiment from hedge fund managers, it's safe to say that there were a few hedgies who sold off their full holdings heading into Q3. At the top of the heap, Alexander Charles McAree's Red Cedar Management dropped the largest investment of all the hedgies tracked by Insider Monkey, valued at an estimated $8.1 million in stock. Israel Englander's fund, Millennium Management, also cut its stock, about $2 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 2 funds heading into Q3.
Let's check out hedge fund activity in other stocks similar to QuinStreet Inc (NASDAQ:QNST). We will take a look at Banc of California, Inc. (NASDAQ:BANC), Athersys, Inc. (NASDAQ:ATHX), Brookdale Senior Living, Inc. (NYSE:BKD), Innate Pharma S.A. (NASDAQ:IPHA), Signet Jewelers Limited (NYSE:SIG), Mercer International Inc. (NASDAQ:MERC), and Anika Therapeutics, Inc. (NASDAQ:ANIK). This group of stocks' market valuations are similar to QNST's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BANC,13,41683,3 ATHX,10,8471,2 BKD,24,199213,7 IPHA,3,10337,-1 SIG,16,183325,-9 MERC,10,103564,0 ANIK,13,56320,-6 Average,12.7,86130,-0.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.7 hedge funds with bullish positions and the average amount invested in these stocks was $86 million. That figure was $110 million in QNST's case. Brookdale Senior Living, Inc. (NYSE:BKD) is the most popular stock in this table. On the other hand Innate Pharma S.A. (NASDAQ:IPHA) is the least popular one with only 3 bullish hedge fund positions. QuinStreet Inc (NASDAQ:QNST) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for QNST is 24.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of third quarter and still beat the market by 19.3 percentage points. Hedge funds were also right about betting on QNST as the stock returned 51.4% during Q3 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.